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Distributed Generation in Rhode Island: Moving from Contracts to Tariffs

This post is the second in a series about a new distributed generation bill introduced in the Rhode Island General Assembly.

On Friday, February 28, a new renewable energy bill – H-7727 and S-2690 – was introduced into the Rhode Island General Assembly. The bill is designed to provide for a steep increase in the amount of so-called “Distributed Generation,” or DG, a particular kind of renewable energy, built in Rhode Island.

You can read general background about Rhode Island’s new DG Bill here. This blog post focuses on one specific, highly innovative aspect of the new DG Bill: the move from contracts to a tariff. A bit of background and explanation is in order. In order to build their projects, renewable energy developers usually need to get funding – a loan from a bank or other lender. Traditionally, developers have sought long-term contracts (LTCs) from utility companies to sell their renewable energy output. The developers then use these LTCs to collateralize a loan to get the money to build their project. Often developers will literally take their LTC to the bank and use it to obtain their financing. In 2009, Rhode Island passed a law requiring the state’s major electricity utility, National Grid, to enter into LTCs with renewable energy developers. (Some other states have similar laws; a Massachusetts statute regarding LTCs has been utilized by Cape Wind.) Then, in 2011, Rhode Island passed a separate statute designed to get Grid to sign up local DG projects for renewable energy in the state. Like the 2009 LTC Statute, the 2011 DG Statute required Grid to enter into contracts with renewable energy project developers or owners.

The Problem with ContractsBut a problem with these renewable energy contracts makes them undesirable for utilities. In fact, this problem has been one of the main reasons that utilities all over the country have been deeply reluctant to sign up renewable energy projects. The problem is this: when a utility has long-term contracts for renewable energy, the contract has adverse effects on the utility’s balance sheet, credit rating, and cost of borrowing. These adverse consequences are mandated by Generally Accepted Accounting Principles (GAAP). The contracts show up on the utility’s balance sheet as a liability; the additional liability affects the utility’s credit rating, and can raise the cost of borrowing for the utility. This costs the utility (and its stockholders) money – and, of course, affects the utility’s openness to renewable energy.

The Solution to the ProblemThe new DG Bill in Rhode Island addresses this problem in a way that we believe may prove to be a model for the rest of the country. It gives renewable energy developers a guaranteed 15- to 20-year tariff instead of a contract. Once a developer qualifies for the tariff, the bill stipulates that it cannot be rescinded or taken away. This new system for paying owners of renewable energy projects would (if enacted) be a classic win-win. The developer gets what she needs: a stream of payments, guaranteed by law, that can be used to collateralize a loan to build her project. The utility gets what it wants: no pesky contracts showing up on its books or hurting its credit rating. And, perhaps best of all, those of us who care about climate change and reducing our dependence on fossil fuels get something very important, too: a new model designed to remove one of the oldest, and longest-standing obstacles to building a robust renewable energy future.

Meeting Renewable Energy Goals in Innovative WaysRhode Island’s new DG Bill sets a very(!) ambitious goal: 160 MW of new DG renewable energy in five years. We believe that this ambitious goal is achievable thanks in part to this new model substituting tariffs for long-term contracts.